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Is Sherwin-Williams the Perfect Stock?

Finding companies that have all the right stuff can produce winners.

Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?

One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide if Sherwin-Williams(NYSE: SHW) fits the bill.

The quest for perfectionWhen you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.

Some of the most basic yet important things to look for in a stock are:

Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.

Margins. Higher sales don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.

Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.

Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.

Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.

Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Sherwin-Williams.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

1.4%

fail

1-Year Revenue Growth > 12%

4%

fail

Margins

Gross Margin > 35%

45.4%

pass

Net Margin > 15%

6.1%

fail

Balance Sheet

Debt to Equity < 50%

59.3%

fail

Current Ratio > 1.3

1.17

fail

Opportunities

Return on Equity > 15%

27.9%

pass

Valuation

Normalized P/E < 20

18.16

pass

Dividends

Current Yield > 2%

2%

pass

5-Year Dividend Growth > 10%

12.8%

pass

Total Score

5 out of 10

Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.

At 5 out of 10, Sherwin-Williams isn't perfect, but it puts in a good showing. As a member of the prestigious Dividend Aristocrats list, Sherwin-Williams has rewarded shareholders with dividend increases in each of the past 32 years.

Sherwin-Williams sits atop the U.S. market for paint, ahead of Masco(NYSE: MAS), Valspar(NYSE: VAL), and PPG Industries(NYSE: PPG). With the housing bust having put a damper on new home construction and the recession cutting back households' remodeling budgets, all of these companies have seen growth slow significantly.

Recently, though, Sherwin-Williams ran into a big roadblock: Wal-Mart(NYSE: WMT) decided it would stop offering its Dutch Boy brand in favor of Glidden, made by European competitor Akzo. The move could mean $100 million in lost annual sales for Sherwin-Williams.

Nevertheless, there are signs that the worst is over for the industry, as sales and profits have at least stopped shrinking. If the recovery takes hold, then Sherwin-Williams is poised to see its business rebound. After all, it's gotten through several recessions in the past with flying (paint) colors.

Keep searchingNo stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Click hereto add Sherwin-Williams to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Author

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.
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